The Changing World Order (Part 1 of 4)

ABOUT THIS QUICK-READ VERSION - Chapter 1 (Part 1 of 4)

This is a concise quick read version of Chapter 1 only of the book by Ray Dalio. It is Part One of a Four-Part series of articles over the next two days. LC

PREFACE

From legendary investor Ray Dalio, author of the international bestseller Principles, who has spent half a century studying global economies and markets.

Principles for Dealing with the Changing World Order examines history’s most turbulent economic and political periods to reveal why the times ahead will likely be radically different from those we’ve experienced in our lifetimes – but similar to those that have happened many times before.

A few years ago, Ray Dalio noticed a confluence of political and economic conditions he hadn’t encountered before. They included huge debts and zero or near-zero interest rates that led to massive printing of money in the world’s three major reserve currencies; big political and social conflicts within countries, especially the US, due to the largest wealth, political and values disparities in more than 100 years; and the rising of a world power (China) to challenge the existing world power (US) and the existing world order.

The last time that this confluence occurred was between 1930 and 1945. This realisation sent Dalio on a search for the repeating patterns and course/effect relationships underlying all major changes in wealth and power over the last 500 years.

In this timely edition, Dalio brings readers along for his study of the major empires – including the Dutch, the British and the American – putting into perspective the ‘Big Cycle’ that has driven the successes and failures of all the world’s major countries throughout history.

He reveals the timeless and universal forces behind these shifts and uses them to look into the future, offering practical principles for positioning oneself for what’s ahead.

?INTRODUCTION

The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history.

A few years ago, I observed the emergence of a number of significant developments that hadn’t happened before in my lifetime but had occurred numerous times in history.

I knew that I couldn’t really understand what was happening and deal with what would be coming at me unless I studied past analogous periods, which led to the study of the rises and declines of empires, their reserve currencies, and their markets. In other words, to develop an understanding of what is happening now and might happen over the next few years, I needed to study the mechanics behind similar cases in history – e.g., the 1930 to 1945 period, the rise and fall of the Dutch and British empires, the rise and fall of Chinese dynasties, and others.

As I studied history, I saw that it typically transpires via relatively well-defined life cycles, like those of organisms, that evolve as each generation transitions to the next.

By seeing many interlinking cases evolve together, I could see the patterns and cause/effect relationships that govern them and could imagine the future based on what I learned. These events happened many times throughout history and were parts of a cycle of rises and declines of empires and most aspects of empires.?

All the empires and dynasties I studied rose and declined in a classic ‘Big Cycle’ that has clear markers that allow us to see where we are in it.

The ‘Big Cycle’ produces swings between 1) peaceful and prosperous periods of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish.

Before I get your head spinning with all the cycle stuff, the main thing I want to convey is that when the cycles align, the tectonic plates of history shift and the lives of all people change in big ways.

The following Principles are timeless and universal truths.

Principle: The swinging of conditions from one extreme to another in a cycle is the norm, not the exception.

?Principle: The really big boom and bust periods, come along about once in a lifetime and so they are surprising unless one has studied the patterns of history over many generations.

?Principle: The future we encounter is likely to be very different from what most people expect.

Principle: No system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fall.

Principle: One’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past.

THIS APPROACH AFFECTS HOW I SEE EVERYTHING

I believe that the reason people typically miss the big moments of evolution coming at them in life is that they experience only tiny pieces of what’s happening. We are like ants preoccupied with our jobs of carrying crumbs in our very brief lifetimes instead of having a broader perspective of the big picture patterns and cycles, the importance of related things driving them, where we are within the cycles, and what’s likely to transpire.

THIS STUDY AND HOW I CAME TO DO IT

One study led to another, which led me to do this study. More specifically:

• Studying money and credit cycles throughout history made me aware of the long-term debt and capital market cycle (which typically lasts about 50 to 100 years), which has led me to view what is happening now in a very different way than if I hadn’t gained that perspective.
• I have been going to China for 37 years and I’m lucky enough to have become well acquainted with the thinking of top economic policymakers and a broad range of others. Having this direct contact has helped me see up close the reasoning behind their actions, which have produced remarkable advances.

My most recent study, on which this book is based, came about because of my need to understand three big forces that hadn’t happened before in my lifetime and the questions they prompt:

• 1. The Long-Term Debt and Capital Market Cycle: At no point in our lifetimes have interest rates been so low or negative on so much debt as they are as of this writing. The value of money and debt assets is being called into question by the supply-and-demand picture for them. In 2021, more than $16 trillion of debt was at negative interest rates and an unusually large amount of additional new debt will soon need to be sold to finance deficits.

A reserve currency is a currency that is accepted around the world for transactions and savings. The country that gets to print the world’s primary currency (now the US but as will see this has changed through history) is in a very powerful position, and debt that is denominated in the world’s reserve currency (i.e., US dollar-denominated debt now) is the most fundamental building block for the world’s capital markets and the world’s economies.

• 2. The Internal Order and Disorder Cycle: Wealth, values, and political gaps are now larger than at any other point during my lifetime.

Principle: When wealth and values gaps are large and there is an economic downturn, it is likely that there will be a lot of conflict about how to divide the pie.

• 3.?The External Order and Disorder Cycle: For the first time in my life, the United States is encountering a true rival power. (The Soviet Union was only a military rival, never a significant economic one). China has become a rival power to the United States in most ways and is becoming strong in most ways at a faster rate.

From examining all these cases across empires and across time, I saw that the great empires typically lasted roughly 250 years, give or take 150 years, with big economic, debt, and political cycles within them lasting about 50 to 100 years.

Principle: To see the big picture, you can’t focus on the details.

MY OBJECTIVE

I had many more questions than answers, and I knew that I was delving into numerous areas to that others have devoted their lives. My main objective is to convey to you my model for how the world works – to share with you a single digestible story of the last 500 years that shows how and why history “rhymes” with what is happening today – and to help you and others make better decisions so we all might have a better future.

Ray Dalio

Next: PART I: HOW THE WORLD WORKS Chapter 1:?The 'Big Cycle' in a Nutshell